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Some Comparisons of Chapter 7 & Chapter 11 Bankruptcies

Posted by: on Tue, Oct 16, 2012

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Some Comparisons of Chapter 7 vs. Chapter 11 Bankruptcies

The filing of a bankruptcy case creates an “estate,” similar to the estate created upon death. The “estate” has a life of its own, it can sue, hold assets, sell property, and operate a business. Chapter 7 is

a liquidation case. The party(ies) filing bankruptcy are called the

“Debtor”/ “Debtors.” The filing of the case sets the date on which property available for distribution to creditors is established. This means that a fee earned by a debtor AFTER the Chapter 7 case is filed, or property acquired with post-filing assets, is not available for distribution to Chapter 7 creditors. This is one reason Chapter 7 is called a “fresh start” bankruptcy.

In every Chapter 7 case, a Trustee is automatically appointed by the Bankruptcy Court to ascertain status of all property of the estate, marshal those assets, protect assets such as a functioning business, collect receivables, and investigate the debtors’ financial history to insure that all property to which the estate may make claim is brought into the fold.

The trustee often sues creditors who have received favorable treatment by debtors within up to one year (depending on status of the recipient) prior to the filing of the bankruptcy case. Trustees also sue debtors if there is a concern that the debtor has assets for which an accounting has not been adequately provided, or where a debtor has failed to surrender or has consumed property which belongs to the bankruptcy estate. Historically, trustees in cases involving professionals and recently or currently operating businesses are extremely pro-active, to the point of closing down operating businesses within 48 hours of the filing of a bankruptcy.

Bankruptcy trustees earn their money on a commission basis. They are highly motivated to collect every possible cent for distribution to creditors. Trustees often file claims on behalf of creditors who never attempted collection, largely to maximize the amount of funds available to distribute to creditors, thus increasing the commission to the trustee.

The appointment of a trustee is a drastic and often costly event in any bankruptcy case where there is a potential for dispute over what property a debtor actually owns or controls. In addition, the

trustee’s fiduciary duty is NOT to the debtor(s), but to the creditors, and there is rarely any concern for financial rehabilitation of a Chapter 7 debtor, the assumption being that this function is served by the availability of exempt property to individual debtors.

A Chapter 11 bankruptcy, on the other hand, is a much more expensive option inasmuch as the legal work is quite concentrated at the front end. It is not unusual to see a $25,000 legal retainer consumed within the first 90 days of the filing of the case. However, there is a substantial

advantage in the fact that a commissioned trustee is not automatically appointed in a Chapter 11 case, although the so-called “Office of the United States Trustee,” a branch of the U.S. Department of Justice, does have oversight responsibilities in all Chapter 11 cases.

A few pitfalls to be aware of is that the existence of a single-creditor bankruptcy will often create a disadvantage to a Chapter 11 debtor, as the single-creditor ends up calling all the shots, and delay is frequently the only advantage of filing a Chapter 11 case in a case with a single large creditor. However, in the case of individuals (as opposed to corporations, etc.) who file Chapter 11, more than one creditor nearly always exists, e.g., the home mortgage, a guaranty or two of debts of another entity, guaranty or co-signing of a debt of a partner or relative, a disputed credit card, a student loan (or that of a child), accrued and unpaid tax debt, credit accounts such as credit cards, auto loans, etc. If there are no such debts, it usually takes only a month or six weeks to create a few additional creditors. IT IS NOT NECESSARY THAT ANY DEBT BE IN DEFAULT IN ORDER TO BE CONSIDERED A DEBT OF A PARTY IN BANKRUPTCY.

EXEMPT PROPERTY FAVORS INDIVIDUAL DEBTORS/NOT CORPORATIONS:

In both a Chapter 7 and Chapter 11 case, INDIVIDUALS (as opposed to non-individuals, e.g., corporations, partnerships, LLCs) debtors are entitled to claim an exemption in a number of different classes of property. Exempt property is retained by the debtors and is not available for distribution to their creditors. Exemptions are usually limited by value/amount. In almost all relevant cases, exemptions may be DOUBLED (“stacked”) in the case of a joint filing (husband and wife). The notable exception is the HOMESTEAD, which is limited to one exemption. Value involve EQUITY. A home which is valued at $2 million bearing a $1.5 million mortgage loan would be exempt in its entirety inasmuch as the equity does not exceed the maximum amount allowed by law. Values are set on the date of filing. Appraisals are frequently needed, especially in cases of business debtors.

Exempt property which would be available to debtors under either Chapter 7 or Chapter 11, provided they’ve lived in Nevada for two or more years, include:

The homestead in which debtor & spouse reside: $550,000

Retirement accounts (IRA/SEP/401K, etc, provided they are $500,000/each

Internal Revenue Code 408 qualified retirement accounts

(NOTE: This can actually be enhanced beyond $500g each

in certain cases, as federal exemptions may also be used)

Vehicle $15,000/each

Household goods/appliances/electrical, etc. $12,000/each

Books/works of art/jewelry/etc. $5,000/each

Tools of trade $10,000/each

Prepaid tuition, unless deposited after judgment ALL

Personal Injury claim proceeds $16,150/each

SSI/Disability/Social Security income ALL

Wild card (anything) $1,000/each

About the Authors: The law firm of Albright, Stoddard, Warnick & Albright is an A-V Rated Nevada-based full-service law firm having attorneys licensed in Nevada, California and Utah. Our firm’s practice includes a strong emphasis on construction related litigation, including lien law and construction defect law.

Note: This article, and any other information you obtain at this website, is not offered as legal advice, nor should it be relied upon as such, nor is it a solicitation for legal services. Only a licensed attorney can advise you with respect to your specific legal needs. We welcome your contacting our firm to discuss such representation. Contacting us does not create an attorney-client relationship.

About the Authors: The law firm of Albright, Stoddard, Warnick & Albright is an A-V Rated Nevada-based full-service law firm having attorneys licensed in Nevada, California and Utah. Our firm’s practice includes a strong emphasis on personal injury accidents. Call us at 702-384-7111.

Note: This article, and any other information you obtain at this website, is not offered as legal advice, nor should it be relied upon as such, nor is it a solicitation for legal services. Only a licensed attorney can advise you with respect to your specific legal needs. We welcome your contacting our firm to discuss such representation. Contacting us does not create an attorney-client relationship. Please do not send any confidential information to us until such time as an attorney-client relationship has been established.